Investing doesn’t have to be difficult. You don’t need to analyze stocks using technical indicators or read the market news every morning to reach your retirement goals.
In fact, financial advisors often recommend a simple, straightforward way to build wealth: automatic, consistent contributions and regular rebalancing.
The power of the dollar-cost ratio
Dollar-cost averaging (DCA) is a popular investment strategy that involves contributing a fixed amount of money to your portfolio on a regular basis, such as each month. Using this strategy to invest in a low-cost, diversified index fund can help you build wealth over time without having to choose which stocks to move — a task challenging enough even for Wall Streeters.
You can stop these investments from happening automatically, which can take the emotion out of investing, making you less prone to panic selling. Dollar cost averaging results in buying during market downturns and rallies, effectively reducing the impact of market volatility on your returns.
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The important role of rebalancing
Many financial advisors also recommend rebalancing your portfolio regularly. This includes selling assets that have performed well and putting that money into assets that are not performing well.
Rebalancing is especially important for people over the age of 50 as their wealth should not be tied up in a few assets that have performed extremely well. Doing so risks not having enough time for their portfolio to recover when prices fall.
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A two-bucket system
Young investors tend to invest in riskier assets such as stocks, as their portfolios have more time to return. But that strategy doesn’t work well if your horizon is short. The two-bucket system can be used as a framework to help ensure you are taking the right amount of risk.
The first bucket should contain enough money to cover short-term expenses, such as your essentials for the next one to three years. You can put this money into a high-yield savings account so that it earns more interest than it would in a regular savings account. The second bucket is the “growth” bucket which includes assets such as stocks and bonds that will grow your portfolio over time.
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The benefit of automating your investment
If you have a 401(k), you probably already have money automatically transferred to the account when you get a paycheck. But banks and brokerage firms often let you make automatic portfolio contributions to individual retirement accounts (IRAs) and brokerage accounts, too. You can also automatically send a portion of every check to the account your money bucket is in.
Schedule times in your calendar to rebalance your portfolio. Some investors choose to measure once a year, while others do so more often. Or you can use a robo-advisor to get help with automatic rebalancing.
The key to achieving financial goals
Discipline can go a long way as you save for long-term financial goals, but automatic investing makes it even easier, as you can “set it and forget it.” You probably won’t reach your retirement goals after a year or two, but doing a dollar-for-dollar calculation and re-evaluating the habit will pay off in the long run.
